March 20 (Bloomberg) -- U.K. house prices face an “utterly unprecedented” decline of 40 percent in nominal terms, as interest rate cuts fail to slow the momentum of decline, according to analysts at Sanford C. Bernstein in London.

“A 40 percent nominal house price fall is utterly unprecedented in the U.K.,” analysts led by Bruno Paulson wrote in an e-mailed note to investors today. Prices have already declined 20 percent, it said.

Past property price crashes in Britain were largely masked by the effects of inflation. In the 1970s, the fall in the house price-to-income ratio to 3.1 from 4.4 “was achieved without a single negative quarter for nominal house prices, thanks to the 25 percent inflation rate,” wrote London-based Paulson. Inflation also eased the effects of the 1990s slump.

“The key difference this time is that more of the drop in the income ratio actually hits nominal prices” because inflation is now lower, the report added.

U.K. housing sales dropped to the lowest since at least 1978 last month as the recession pushed down prices, according to the Royal Institution of Chartered Surveyors, while the economy suffered its worst contraction since 1980 in the last three months of 2008.

The British house price-to-income ratio will decline to 3.2 times from 5.8 times, the note added.

The analysts said that attempts to predict house prices based on affordability, interest rates, or price levels were fruitless. “The only factors that actually mattered much were, firstly and most importantly, the previous year’s movement in the index” and economic growth.

‘Downward Momentum’

“House prices are driven primarily by momentum, with GDP growth (or the lack of it) also contributing,” the report said. “History also suggests that the recent interest rate cuts, while welcome, are unlikely to have much effect in stemming the house price falls, while increases in mortgage supply are also unlikely to make much difference,” it added.

“The problem is that the negative momentum is now well- established,” they said.

The U.K. housing market may be showing “green shoots” as government measures to boost lending gradually help to stem the slump in sales, according to reports by UBS AG and Goldman Sachs Group Inc. today.

“Even though housing-market activity and investment may stabilize at low levels in the near term, current levels are so low, relative to sustainable metrics, that an eventual larger rebound is warranted,” Goldman analysts wrote.

“The various measures initiated by the government will help limit the extent of credit tightening and that will, in our view, support transactions,” UBS wrote.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: March 20, 2009 10:26 EDT